BUDGET

CBO Analysis Not Black and White

By Katy O'Donnell and Billy House

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Van Hollen: Arriving at Tuesday’s meet.(AP Photo/Harry Hamburg)

The country’s financial picture would be rosier if not for cyclical factors such as unemployment, but structural issues still ensure that the scene is dripping with red ink, the Congressional Budget Office advised a member of the deficit super committee on Tuesday.

According to the CBO analysis, if the economy were operating at its potential, the nation’s projected 2012 deficit of roughly $973 billion would instead be about $630 billion. Revenues would be higher because incomes would be too, and outlays to benefits programs such as unemployment insurance would be lower.

The nonpartisan CBO’s evaluation highlights nuances often missing in the conflicting views of the 12 Republicans and Democrats on the Joint Select Committee on Deficit Reduction over the main causes of the nation’s seemingly never-ending red ink. It could also affect tense negotiations over the role of spending cuts and raising revenues in curing the nation’s fiscal maladies.

Those are simple, intuitive points, but ones that undercut the potency of both parties’ talking points on the deficit. Republicans on the super committee have largely blamed spending, which has recently ballooned as a share of GDP. Democrats on the panel insist that new taxes must be part of the solution since revenues are historically low.

The CBO analysis—posted Tuesday on its website—was provided in response to a Sept. 27 inquiry from super committee member Rep. Chris Van Hollen, D-Md., who also is the ranking Democrat on the House Budget Committee. The committee met behind closed doors on Tuesday morning for about three hours; members hurried past reporters with little comment afterward.

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Committee members offered no immediate response to the CBO analysis released later, or how it might be seized upon, or whether it makes any difference at all to their troubled deliberations. They are scheduled to meet in private again on Wednesday morning.

But the CBO’s letter could be a good impetus for the two sides to start bridging their differences on federal spending and revenues. The letter clearly indicates that the circumstances of the worst economic downturn since the Great Depression have contributed to the burgeoning gap between revenues and outlays, weakening each side’s selective use of “historical averages” because one-third of the problem is a product of a bad economy rather than the policies of government spendthrifts or tax zealots.

The CBO had earlier reported that when employment levels off, revenue will rise to a historical average of about 18 percent—assuming that the tax cuts enacted under President George W. Bush are extended. If the cuts expire as scheduled, revenue would rise to about 21 percent of GDP in 2021 and spending would be nearly 23 percent.

The letter could affect the committee’s discussions, but only on the “margins,” according to Ed Lorenzen, an outside analyst who worked on the staff of the president’s fiscal commission last year and advises the independent Washington-based Committee for a Responsible Budget.

“Obviously part of the point is to show that stronger economic growth would make the deficit outlook look better, but it also shows that even if the economy were operating at full potential, which we’re a long way away from, we’d still have a structural deficit,” Lorenzen said. “It’s still a substantial problem; it’s going to take tough choices beyond economic growth to solve the problem.”

Van Hollen offered a different take when asked on Tuesday night about the CBO analysis, after a closed-door meeting of only Democratic members of the super committee. He said he sees it as supporting Democratic contentions that deficit reduction must include a balanced approach that also focuses on kicking the economy into higher gear and creating jobs.

“I think it made it very clear that we need to focus on getting the economy moving again and getting people back to work,” said Van Hollen.

Sen. Patty Murray, D-Wash., the Democratic co-chair of the deficit committee, confirmed that the Democratic-only meeting on Tuesday afternoon and evening was held after a planned meeting of the full committee had been postponed.

She did not discuss the reasons for that postponement, but said the Democrats had been busy “fleshing where we need to be in order to get to a fair and balanced approach, and we’re making progress.”

“We’re working hard to find an agreement and that’s what we’re hoping [for],” she said.